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IRAs

03/07/2017

“Time flies, people get married, divorced, or remarried. Children grow into adults. Family and individual circumstances change, but how often do we revisit our living and testamentary estate plans? Every year we hear of a death of a family breadwinner who died without a will.”

The (Dunwoody GA) Crier notes in its recent article, “Estate planning basics 2017,” that in Georgia (and also Alabama), if a married person dies without a valid will, what passes to the spouse depends on whether or not the deceased has living descendants. If this is the situation, they and their spouse share in the intestate property equally, but the spouse’s share can’t be less than a third (half in Alabama).

If you don’t have a will, the state will make those decisions for you. The provisions may be less than ideal. When it comes to property disposition, a will is just a piece of an estate plan. If you own assets jointly with another person, such as joint tenants with right of survivorship (JTWROS), the property passes outside of a will or probate directly to the survivor. The same is true for a Payable on Death (POD) designation.

Beneficiary designations on retirement plans like 401(k) plans, IRA accounts, and life insurance, also pass assets directly to the named beneficiary or beneficiaries. The disposition of assets held in a trust is governed by trust provisions.

If you died today, are you sure your assets would pass according to your wishes? Is your estate plan tax efficient? If you own a business, do you have a succession plan to maximize value to your heirs and surviving business partners? Succession planning for a closely-held business is a structured plan to transfer ownership, control, and management of the business.

Your 18-year-old is off to college. She’s now an adult. If she had a terrible accident and was hospitalized, her parents, under privacy laws, can’t get any medical information on their adult child. Without a Durable Power of Attorney for Health Care, appointing mom or dad as decision maker, you’re powerless. If you’re responsible for a young adult, you need to have a will and powers of attorney for assets and health care in place.

03/06/2017

“The beneficiary designation form is one of the most important estate planning documents, but it is often overlooked when creating a legacy plan.”

Baby boomers have been planning and saving for retirement for a long time. They’ve also been planning their legacy. This includes drafting wills, trusts and other estate planning strategies to transfer their wealth to heirs. But some may not know that their IRAs and qualified retirement plans, which can be a big part of their estate, aren’t subject to probate and are not impacted by the terms of a person's will. These assets pass to the next generation via their beneficiary designations.

The estate as a beneficiary. People will inadvertently name their estate as the beneficiary of their retirement accounts by either directing their retirement assets to be paid "pursuant to the terms of my will," failing to complete their beneficiary designation form or forgetting to name a new beneficiary after one dies. When this occurs, these assets are typically paid to the estate by default, which is not the best beneficiary for IRAs and retirement plans. These assets normally avoid probate, but become subject to probate, when paid to the estate. The probate process can be lengthy and expensive. These assets might also have to be liquidated and paid to the estate within five years after a person's death.

Individual beneficiaries can have IRA assets paid over their lifetimes to stretch their tax liability over many years. However, estates do have this option. One more thing: estates are subject to a much higher income tax rate than individuals, sending more money to the IRS than is necessary. Avoid this and make certain that you have an up-to-date primary and contingent beneficiary designated for all of your retirement accounts.

Trust as a beneficiary. Some people use trusts to affect a transfer of wealth and to maximize all available gift, estate, and generation-skipping tax exemptions. However, there are several issues with having retirement assets paid to a trust. The "stretch" rules generally don’t apply to trusts, unless the trust is drafted to be a "look-through" trust. In that case, the IRS lets you "look through" the trust and "stretch" the IRA to the trust over the life expectancy of the oldest trust beneficiary.

It can also be pricey to establish and maintain trusts. These fees can significantly reduce the amount that the ultimate beneficiaries will receive. Finally, trusts are subject to the 39.6% tax rate when the income exceeds $ 12,400. By contrast, married taxpayers filing jointly don’t reach that rate until their income exceeds $366,950, which means if the IRA is worth more than $ 12,400, over a third can be lost to the IRS.

Speak with your estate planning attorney before you designate a trust as a beneficiary of a retirement account.

Ex-spouse as a beneficiary. This is not done intentionally, but it happens. People don’t update their beneficiary designations after a divorce. Some think that the divorce decree will automatically negate their prior beneficiary designations. This is not true.

Per stirpes or per capita. IRA and retirement assets aren’t always distributed as designed. Most IRAs will allow the owner to designate multiple beneficiaries. If an owner designates his or her children as equal beneficiaries, if one predeceases the owner or "disclaims" the inheritance, the remaining primary beneficiaries will usually receive the balance of the IRA and not the children of the deceased beneficiary.Avoid costly mistakes and be sure that the intended beneficiaries inherit your hard-earned assets. Conduct a review of your IRAs and retirement plan beneficiaries regularly.

11/26/2016

“What is best for an heir to avoid taxes and let IRAs grow until a proper age?”

It is likely that you and your spouse each have an IRA. It is also likely that you have named one another as the primary beneficiary upon death. Thereafter, you likely have named your child as the contingent beneficiary on your respective IRAs.

The USA Today’s article, “Tips on the best way to pass your IRA down to your child,” advises that when your child inherits the IRAs, the best way for him or her to avoid taxes and let the accounts grow is to name your child as your "contingent beneficiary" (to inherit the IRA if the other spouse does not survive you). In that way, your child will be able to hold that account as an "inherited” IRA.

Your child is entitled, under the current law, to withdraw the money gradually over his or her life expectancy. Although he or she must withdraw a certain amount each year (a required minimum distribution or RMD) and pay taxes on that amount, the RMDs are usually small, especially in the early years.

The account might last until your child reaches his or her mid-80s by taking advantage of the "life expectancy" or "stretch" payout.

However, there's nothing to prevent your child from withdrawing more than the RMD—or even cashing out the whole account right after you pass away.

In order to prevent this, you'd have to use a much more complicated strategy and the help of an estate planning attorney. You could place your money in a “trusteed IRA” or leave the IRA to a “see-through trust” for your child's benefit.

Here is one other piece of bad news: the U.S. Congress is currently considering legislation that would force a five-year payout for inherited IRAs over $450,000.

Reference: USA Today (November 10, 2016) “Tips on the best way to pass your IRA down to your child”

11/24/2016

“A critical link in the chain that makes a smooth and productive transition to the next generation is an effective estate plan.”

Farm Futures’ recent article, “8 signs your estate plan is off track,” gives you several reminders to make sure you’re on track.

1. Simply a will-based estate plan or simply no plan. Wills can be efficient estate planning tools, but frequently they’re not used correctly. A sound estate plan should have an objective of avoiding probate. A will that’s not properly used often puts the estate into probate, creating delays and expenses.

2, Failure to fund a revocable living trust. This can create as many problems as a poorly written will. When assets aren’t properly included in the trust, it can negate the trust’s benefit. Work with a qualified estate planning attorney to review the paperwork and be certain that real estate, intellectual property, certain types of stock, business partnerships, and promissory notes are properly included in the trust.

3. Exposed assets. If you have assets held as joint property, it can be an issue if the surviving spouse has a lot of debt. Make certain that these assets are titled correctly and insured properly. Otherwise, debtors could file claims to get at those assets.

4. Assets that are given outright to beneficiaries. These assets may be unprotected from creditors, predators, divorcing spouses, lawsuits, outside influences, and an heir's bad judgment. Talk with an experienced estate planning lawyer to help you find the appropriate instrument to protect the asset and deliver it to the intended beneficiary.

5. Using family members as successor trustees. If you name family members as successor trustees, you might name two or more co-trustees. If they don’t get along, don't trust each other, or if they disagree with each other's decisions, they could end up in court. You can avoid delays, fights, and possibly litigation by naming a bank or trust company as the primary trustee and family members as co-trustees. This lets the primary trustee resolve issues and save the family time and money.

6. Beneficiary designations that are out-of-date. Update your beneficiary designations for annuities, 401(k)s, IRAs or life insurance that you set up a long time ago.

7. Too much or too little life insurance. Be sure to review your life insurance regularly. There are plenty of reasons, like changes to federal and estate tax exemptions, policies you purchased to generate income may be underperforming, and policies with high cash values may be mature and ready to provide cash flow or to be terminated in favor of other investments.

8. No long-term care planning. There are a lot of people who fail to think about an extended illness or deteriorating mental capacity. Most of us will need some long-term health care. Make sure that your estate plan addresses this risk.

10/19/2016

For many of our clients, assets held in retirement accounts comprise a significant portion of their estate. With the decrease in the number of companies offering defined benefit pension plans, planning and saving for your own retirement has taken on heightened importance in the past several years.

According to the Investment Company Institute, Americans have approximately $24 trillion invested in retirement accounts, including IRAs and other retirement vehicles. This article will focus on IRAs. If you have other types of retirement plans, review the plan documents prior to taking action.

Generally, married couples name each other as the beneficiary of their IRAs. This is because a surviving spouse is entitled to rollover the deceased spouse’s IRA into his own IRA. These, and other tax benefits, do not apply to other non-married beneficiaries. However, if the surviving spouse is receiving long-term care or is on Medicaid, then it might make sense to consider other options which could cause less beneficial tax ramifications. The family must weigh the long-term care expenses against the potential tax savings of doing a spousal rollover. This analysis should not be done without the assistance of a certified elder law attorney knowledgeable in tax matters.

Besides naming a primary beneficiary of your IRA, it is also wise to name contingent beneficiaries. These are the people who would inherit your IRA if your primary beneficiary predeceases you or upon the death of the surviving spouse. It is common for people to name their children as contingent beneficiaries of their IRA. Instead of children, or if you don’t have children, you can name other family members, a trust or charity, among others, as the beneficiary of your IRA.

From a financial and tax planning standpoint; it is desirable to keep IRA assets invested as long as possible. Income and gains accumulated inside an IRA are not taxed until the funds are withdrawn. Whereas, assets outside of an IRA are typically taxed each year. Assets inside an IRA will grow faster since they are not depleted by taxes each year. So, the longer assets can remain invested in an IRA, the faster they will grow. In the financial world, this is known as a “stretch” IRA. So, the younger the beneficiary of the IRA, the more it can be “stretched” and the greater the tax advantages. If there is more than one beneficiary, the IRS has convoluted rules for whose age is to be used to calculate the distributions from the IRA. Also, if a charity is named as beneficiary, the ability to “stretch” the IRA will not be available.

Of course, there is no guarantee that the IRA beneficiary will go along with the “stretch.” While not wise from a tax perspective, the beneficiary may withdraw all the funds at any time; even if it causes significant tax consequences. One of the things many of us have learned is that the next generation does not see things the way we do. One way to maintain control over when the beneficiary takes distributions is to make a trust the beneficiary of your IRA; however, the IRS has very strict rules on the types of trusts that will allow you to obtain the tax benefits of “stretching” your IRA. If all the complex rules and regulations are not followed, your beneficiaries must pay taxes on your IRA a lot sooner than you would have wanted. Also, by utilizing a trust as the beneficiary of your IRA, you can provide for the special needs of a beneficiary who is disabled without compromising his government benefits. This type of trust, however, differs from the trust you would use to “stretch” your IRA and will not provide the same tax benefits. In these scenarios, balance the potential tax savings against the possible loss of government benefits by not utilizing a special needs trust.

Confused? You’re not alone. These rules are complicated and there are many traps for the unwary. To do it right, you need someone experienced in tax, trust and elder law matters. With $24 trillion invested in retirement accounts, a lot is riding on getting the proper advice.

10/17/2016

US News' May 6 article, "Why You Should Prepare Now for the Death of a Spouse," notes that we've all heard horrible stories where the widow knew nothing about the family finances and was either blindsided by debt or taken advantage of by people who offered to help her manage her finances. So, even though it's not very pleasant, it's prudent for both spouses to be prepared for the other spouse's death—even if both intend to live for a long time.

This is a big job. Here are some of the important steps to take to prepare for the worst.

Make certain your documents are in order. This should include life insurance policies, wills, property deeds, car titles, and bank account and investment details. Both spouses should know the location of these and make sure they are up to date.

Don't neglect a will. Yes, you know you need to have one. No, don't put it off until next month or next year. Here's a cautionary tale that highlights why it's important to get a will written immediately. A 30-ish wife with two young boys saw her husband die unexpectedly. He didn't have a will, and state law said that half of his assets should go to his wife and half to the kids. Okay, that sounds good. However, the kids were young, and the money went into a court-controlled account that she couldn't get to without going to court for appointment as their guardian. As a result, she had to get permission from the court every time she wanted to use the funds.

Organize your passwords. There will be all kinds of headaches if you can't access a bank account because your spouse had a special password you don't know. Spouses should make a list of passwords for all online accounts. This includes 401(k)s, investments, bank accounts, and social media. The list should be stored in a location known by both spouses and their adult children.

Plan now and eliminate headaches later. It's much less costly to work things out now rather than waiting until you're grieving and emotionally drained. The better organized and prepared you are, the more concisely you can communicate your wishes and the faster your estate planning attorney can prepare your documents.

Reference: US News May 6, 2016) "Why You Should Prepare Now for the Death of a Spouse"

10/15/2016

"If you haven't checked the beneficiaries of your accounts, you still have some work to do."

Nerd Wallet, in "Avoid This Estate Planning Mistake," reminds us that many assets have their own beneficiary designations, including retirement plans like 401(k)s, 403(b)s, pensions, IRAs, annuities and life insurance plans.

Many folks don't check them. They think their will or living trust controls their distribution. Classic estate planning mistake.

Sometimes it's a shock to discover that the deceased spouse didn't update the beneficiary designations. The beneficiary is still the husband's first wife—whom he had designated 25 years ago when he first established the account. As a result, his surviving spouse receives none of the funds associated with his IRA. The ex-wife gets the money.

Under the law, assets like IRAs aren't subject to probate, but instead are passed using a beneficiary designation. They aren't controlled by a will. The only situations in which a will controls a non-probate asset are if there's no designated beneficiary or if the beneficiary is the estate.

The Supreme Court has ruled that your beneficiary designations on insurance policies, IRAs, and other retirement accounts will always trump the beneficiaries of your will in case they are different.

So make certain that updating beneficiaries is a part of your financial planning checklist. Review the beneficiaries of your non-probate assets every few years; and make sure the beneficiaries of your will and living trust are still the individuals or entities that you want. These documents help heirs avoid probating your estate and allow you to establish beneficiaries for assets that don't have specific beneficiary designations.

You've worked hard to create a legacy for your family. Take these actions to avoid a simple but costly mistake that could damage that legacy.

10/05/2016

“First-timers get a special grace period, but doubling up distributions in one year can lead to a bigger-than-expected tax bill.”

If you turned 70½ in 2015, you were required to take your first required minimum distribution from your IRA by April 1, 2016. But do you need to take another RMD by the end of this year?

Kiplinger’s article, “RMD Tips for Retirees Taking Their First Required Minimum Distributions,” explains that, generally speaking, you need to take your required minimum distributions by December 31st every year. However, your first RMD may be delayed until April 1 of the year after the year you turn age 70½, but you have to take a second RMD (the one for age 71) in the same year by December 31st.

If you have to take two RMDs in one year, as many do, it could cause an individual to experience an unexpectedly large taxable income for the year. This could put you into a higher tax bracket and also impact the amount of your Social Security benefits subject to taxes.

Also, note that if your adjusted gross income plus tax-exempt interest income rises above $85,000 if you are single or $170,000 if married and filing jointly, you’ll pay more for Medicare premiums—$170.50 to $389.80 per person each month for Part B premiums and an extra $12.70 to $72.90 per person each month for Part D.

The IRA required minimum distribution you take on April 1st is based on the balance in your traditional IRAs as of December 31, 2014, and the second RMD of the year is based on the balance in your IRAs as of December 31, 2015.

Even so, you can decrease the taxable amount for the current year by making a tax-free transfer to charity of up to $100,000 from your IRA anytime during the year, but it’s too late to make a tax-free transfer for your 2015 RMD. That amount will count as your required minimum distribution for the year, but it isn’t included in your adjusted gross income.

The law allowing for such transfers has been extended permanently. As a result, you don’t need to wait for Congress to approve it at the end of each year before taking action. Speak with your IRA administrator and the charity for more information about how to make the transfer.

02/19/2016

Happy milestone birthday, Baby! 2016 is the year the first baby boomers will reach age 70. It is also the year for some critical decisions that will affect your retirement years. Here are some deadlines you won’t want to miss.

Sign up for Social Security. If you have delayed taking Social Security so you can receive the maximum benefit, now is the time. There is no advantage to waiting beyond age 70.

Start taking required minimum distributions from your tax-deferred plans. Uncle Sam says you must start taking distributions from your IRAs and other tax-deferred plans after you reach age 70 ½. If you miss this deadline or you don’t take out enough, there is a 50% penalty. (Exception: If you have money in an employer plan, you continue working beyond age 70 ½ and you own less than 5% of the company, you can delay your required beginning date on that employer’s plan until your actual retirement date.)

To determine the amount you must withdraw each year, divide the year-end value of your account by a life expectancy divisor found on a table provided by the IRS. (Most people will use the Uniform Lifetime Table, but if your spouse is more than 10 years younger than you, you will use a different one.) For example, the divisor for age 72 is 25.6. If your year-end account balance is $100,000, divide $100,000 by 25.6. The amount you are required to withdraw that year, then, is $3,906.25. You can withdraw more at any time, but this is the amount you must take out for that year’s required minimum distribution.

Minimum distributions are required for each tax-deferred account you own. Consolidating your accounts will make calculating and withdrawing distributions much easier.

Avoid taking two distributions in the same year. Generally, distributions must be taken by December 31 each year. However, you can delay your first required distribution until April 1 following the year in which you reach age 70 ½. But this would cause you to take two distributions in one year…April 1 for the previous year and December 31 for the current year…and that will increase your income, causing you to pay more in taxes. Remember, you have not paid income taxes on this money, so all withdrawals are taxed as ordinary income.

Review your estate plan and plan for long term care. Now is the time to review your plan with your professional advisors. You may need to revise your will or trust, beneficiary designations, powers of attorney, and healthcare documents. Be sure to plan for the possibility of long term care—consider options for how, where and by whom care would be provided, and how to pay for the costs. If you want to conserve assets for your family, consider purchasing long term care insurance to offset some of the expenses. Finally, have that difficult but absolutely critical conversation with your family about your wishes and the plans you have put in place.